International economic outlook: November 2022

Summary

Forecast Changes

• While relative growth and monetary policy trends favor renewed U.S. dollar strength over the near term, they increasingly favor more pronounced U.S. dollar weakness over the longer term. We still forecast renewed strength in the trade-weighted U.S. dollar through until Q1-2023. However, we now expect a more extended period of greenback weakness beyond that. From Q1-2023 through the end of 2024, we expect the trade-weighted U.S. dollar to fall by a cumulative 12.5%.
• We view the yen as particularly sensitive to any swings in growth and monetary policy trends, and see the Japanese currency strengthening over the medium term, targeting a USD/JPY exchange rate of JPY135.00 by Q1-2024. We also forecast less near-term weakness and a stronger medium-term rebound in the euro than previously.
• China's economy continues to face COVID and real estate related challenges, and we have lowered our 2022 and 2023 GDP growth forecasts. That said, we only forecast modest weakness for the renminbi from current levels. For other emerging market currencies, we now see a stronger medium-term outlook for the Mexican peso, South African rand and Korean won.

Key Themes

• Tentative signs are starting to emerge suggesting that a peak in inflation may be close at hand. CPI inflation has eased from highs across the Americas as well as in several emerging economies, though for now, there has been little to no inflation relief across Europe. Importantly however, supply chain disruptions appear to be improving, while commodity prices have also fallen in the past several months. We expect CPI inflation to slow meaningfully to 5.2% in 2023 from 7.2% this year, although the deceleration in core inflation may be more gradual.
• Even as inflation recedes, the after effects of rapid inflation and rising interest rates will probably linger for some time. In the Eurozone and the United Kingdom, which have been particularly affected by high energy prices and inflation, economic recessions likely began in late 2022 and will persist through much of 2023. In the United States, economic trends remain quite resilient and could push the Fed's policy rate above 5.00%, though we ultimately expect the United States to fall into recession by late 2023 as well.
• A peak in inflation and policy interest rates should also coincide with a turn in the U.S. dollar. We expect the trade-weighted U.S. dollar return close to prior highs by around Q1-2023. However, as the U.S economy slows and falls into recession, and the Fed ultimately eases monetary policy, we subsequently forecast an extended period of U.S. dollar weakness. Dollar depreciation should initially be moderate during the latter part of 2023, with more pronounced U.S. dollar depreciation likely in 2024.

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